A big change to student aid you’ve never heard of

The Obama administration has a smart way to address one of the biggest flaws in a $20 billion college aid program, which would help millions of low-income undergraduates pay for school. The proposal hasn’t gotten any attention because it involves an obscure accounting switch and was buried in the president’s final budget — in a 238-page supplemental document colloquially called “the green book.”

Our op-ed today in TheHill explains the proposal and why it has such a big effect for certain students.

The proposal would fix a flaw in tuition tax benefits that we highlighted in an analysis last year. Nearly 40 percent of undergraduate students can’t claim these benefits, including the $2,500 American Opportunity Tax Credit, even though they are technically eligible. That is because federal financial aid is set up so that colleges apply Pell Grants to tuition first, leaving students to pay their living expenses out-of-pocket. That often means low-income students have no tuition expenses with which to claim a tax credit, yet they incurred thousands of dollars in living expenses while enrolled in school.

If colleges instead applied Pell Grants to a student’s living expenses first, and students paid their tuition out-of-pocket, students could then claim the tax credit and the Pell Grant. The Obama administration’s proposal would allow that scenario to become automatic, helping more students claim their aid.